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The global ferrosilicon market remains under pressure

market insights

September 24, 2019

The summer lull is over but the situation in the ferrosilicon (FeSi) market is still under stress. Sitting on high stocks suppliers are trying to attract customers with lower prices, while steel mills either are postponing purchases to wait until prices have bottomed out or are buying small volumes amid uncertain prospects of the finished products market.

The problem of FeSi oversupply is still unsolved in China

According to market sources, the supply of FeSi in the Chinese market currently exceeds demand. Some producers have managed to offload volume during the September round of monthly purchasing from the biggest Chinese steel mills. As a consequence, Chinese FeSi tender prices have fallen. Hebei Iron and Steel (HBIS) has decreased its purchasing price by RMB 250/mt to RMB 6,200/mt ($870/mt) DDP.

Nevertheless, Chinese spot prices for FeSi have been relatively stable for the last five weeks. One reason is the high production costs. This year Chinese ferroalloy producers have received much lower discounts for the electricity tariffs during the rainy season. According to market sources, currently only a few FeSi plants in China are still profitable whilst the majority of plants make a loss. The profitable FeSi plants receive power from its own hydro-power plant. Little change is expected soon. The local Chinese authorities have toughened environmental controls ahead of the upcoming national holiday (1st week of October) and issued production restrictions. This affects especially the Northern provinces of China where the biggest FeSi producers are located.

European consumers decrease the purchasing volumes amid gloomy steel market outlook

The quarterly contracting campaign for Q4 in Europe has brought some frustration to FeSi suppliers. Regardless of low prices, prices have lost EUR20/mt from late-August and keep going down, consumers are still inactive and are not in a rush to sign Q4 FeSi contacts. Some steel mills may decide to buy more material in the spot market, taking advantage of falling prices. This lowers their volume requirements for Q4 quarterly contracts. Meanwhile, European suppliers are sitting on high stocks and face intense competition from suppliers from abroad.

Modest performance of the steel industry provides pressure on the European FeSi market. Worldsteel Association data shows that over January-July Europe has produced 80.4 million mt of crude steel, down 2% YoY (Germany has down 5% to 24 million mt, France was down 3% to 9 million mt and Italy down 2% to 14.7 million mt). In its recent market outlook, the European Steel Association (Eurofer) notes that the EU steel market is facing severe challenges which are expected to have a negative impact on steel consumption. Real steel demand for the full year 2019 is expected to fall by 0.4% YoY.

Meanwhile, the current EU safeguard measures system is flawed. The EU steel market suffers from decreasing steel demand and faces the ongoing threat of imports deflected from the US to the EU due to the US Section 232 import tariffs. The expected reduction of steel demand in 2019 is therefore expected to come mainly at the expense of EU steel producers.

Biggest silicon producer in the world sales the assets, struggling with the company’s debts

Earlier this month, Ferroglobe completed the sale of 100% of its subsidiary FerroAtlantica S.A.U., which includes 10 hydroelectric power plants with a total capacity of 167 MW and the Cee and Dumbria ferroalloy plants located in Spain, to TPG investment firm Sixth Street Partners. The value of the transaction was €170 million. The proceeds will be used to repay the existing debt in FerroAtlantica in the amount of €57 million. Ferroglobe has signed a long-term tolling agreement with FerroAtlantica, giving it the first exclusive right to sell all future products in exchange for the supply of key raw materials.

Ferroglobe was forced to take this step, having failed previously to resolve its debt problem. In April-June, Ferroglobe's revenues fell by 8.5% QoQ to $409.5 million. (down 29% YoY) due to the continued deterioration of the market environment, according to the company’s report. Despite an 11.2% QoQ decrease in production costs, the company's quarterly loss increased 1.5-fold to $43.7 million., and its net debt at the end of the quarter was $478.3 million., up 14% QoQ.

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